—Hints Sub-Zero Rates Could Be Most Effective During Recovery
By Laurie Laird
LONDON (MaceNews) – The UK economy does not require sub-zero interest rates at present, according to a top central banker Wednesday, who added the negative borrowing rates have been most effective in other jurisdictions once a recovery is underway.
“The time” for negative rates in the UK “is not right now,” said Dave Ramsden, the Bank of England deputy governor for markets and banking in a virtual address to the Society of Professional Economists.
But he reiterated comments of BoE Governor Andrew Bailey, insisting that sub-zero rates are “certainly in the toolbox for potential use in future as my assessment of their effectiveness changes.”
The Bank wrote to financial institutions earlier this month, asking about the procedural challenges to computer systems should rates fall below zero in the future. But that was not an instruction that banks “begin taking steps” to ensure operational readiness for negative rates, Ramsden added, even as he admitted that the Bank’s Monetary Policy Committee is working “ensure all our [internal] systems would be able to handle negative rates if needed.”
However, Ramsden echoed recent comments of Governor Bailey about the increased effectiveness of negative rates once an economic recovery is entrenched. When asked about the optimal timing of a interest rate cut from the current level of 0.1%, Ramsden noted that “something that is changing is where we are in the economic cycle.” Negative rates may be less effective during the depths of a downturn when banks are providing for non-performing loans, he added.
Ramsden hinted that enhanced forward guidance and increased quantitative easing remain the preferred tools should the economy require stimulus in the near term. The Bank has “QE headroom remaining, he stressed, adding that he regards QE as the “MPC’s marginal policy tool at present.”
The Monetary Policy Committee meets on 5 November, and the group will submit to “a full round of forecast and policy meetings” ahead of those deliberations.
Recent economic data suggest the economy recovery has weakened markedly in recent months. Gross domestic product rose by just over 2% between July and August, the slowest growth since the economy bottomed in April. Unemployment jumped to 4.5% in the three months to August, but many economists fear that joblessness could skyrocket when the current furlough scheme expires at month end. Ramsden admitted that he remains “concerned” about labour market recovery.”
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Contact this reporter: laurie@macenews.com.
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